Home / Markets / Mark To Market /  Automobile industry woes and the conundrum of a cut in the GST rate

Mumbai: The fear of slowing automobile sales tipping over into a recession is mounting. The industry is pinning its hopes on a cut in the goods and services tax (GST) rate from 28% to 18% to reverse the trend. But the government has to balance several aspects of growth and fiscal prudence.

Indeed, the spotlight is on 20 September, when the GST Council is to meet and the uncertainty on the rate cut would come to an end.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

To be sure, industry will welcome a rate cut as it could spur latent demand. Analysts estimate that a 10% cut in the GST rate would imply a 7-8% reduction in on-road prices, and boost retail sales of two-wheelers and passenger vehicles (PVs).

According to Kavan Mukhtyar, partner and leader (automotive) at PwC India: “Such temporary measures, called pump priming in economics, are often used to activate demand in a crucial industry, which has a multiplier effect on many other sectors." It would surely help trim BS-IV inventory.

That said, the GST rate cut may not help the cause of commercial vehicles (CVs), where the decision to buy depends not only on the price, but also on the returns the owner generates from his investment in a truck.

While India has effectively used excise duty cuts to propel auto sales during the slowdown in FY09 and FY14, the scenario is not the same now. “For investors, a temporary GST cut now and likely revival in the second half of FY20 demand could complicate the FY21 scenario, particularly for two-wheelers and diesel PVs, besides medium heavy commercial vehicles (MHCVs), where a GST rollback will be an additional overhang over and above the expected sharp price increase post shift to BS-6 from 1st April, 2020," said Arya Sen, equity analyst at Jefferies India Pvt. Ltd.

In Brazil, too, when the government reinstated a consumer tax on new vehicles (price hike of 4.5- 7%) in a scenario of an economic slowdown, auto sales declined.

Yes, the auto industry in India is in the doldrums. In August, CV sales dropped by 39%, PVs by 32% and two-wheelers by 22%.

At the same time, the GST Fitment Committee assessment of a 50,000 crore fiscal impact from a 10% GST rate cut on vehicles, is a spoke in the wheel.

That’s not all. Muktyar of PwC India said that a lower GST rate would hit state government finances. Hence, there could be resistance from states to cut rates, unless they are compensated in some manner.

Be that as it may, investors in the auto universe seem to be optimistic either of a GST rate cut or that the worst is behind. The Nifty Auto index, which fell sharply since mid-April due to demand uncertainty and an overall slowdown, has gained 7% last week, when the government hinted that it was considering a GST rate cut.

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